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Grocers Balk at Food Price Increases

NEW YORK -- As commodity costs such as corn and wheat fall from summer highs, and the economy continues to decline, U.S. food retailing chains are fighting food manufacturer’s efforts to increase prices further, The Wall Street Journal reported.

U.S. retail grocery-store prices rose 7.6 percent in September from a year earlier, the report stated, citing the Bureau of Labor Statistics. Traditional supermarkets are under growing pressure to compete with low-cost grocers such as Wal-Mart Stores Inc. and Germany-based Aldi Einkauf GmbH. And retailers have suffered as consumers trade down to discount stores and inexpensive private label products, the report stated.

"It's going to be difficult for food companies to maintain price let alone take price," Jim Hertel, managing partner at retail consulting firm Willard Bishop LLC, told the Journal. "The prospect of a prolonged economic slowdown has made retailers' price competitiveness top of mind."

While reluctant to publicly discuss supplier relations, supermarkets have told financial analysts they're taking a tougher stance with vendors, according to the report.

"There isn't a retailer who doesn't tell us that they're going to put more pressure on suppliers," Volker Bosse, a retail analyst with UniCredit Markets & Investment Banking in Munich, told the newspaper. "Retailers face a strong head wind from falling consumer confidence."

Some retailers also are asking for better service, more leeway in discounting and special promotions, Bosse added.

U.K. retailers are "increasingly resistant to accepting price increases as they engage in a price war,” Credit Suisse analyst Robert Moskow said in a recent research note, adding manufacturer vendors such as Heinz have responded with more promotional allowances than ever before.

During a meeting with analysts earlier this week, Eduardo Castro-Wright, chief executive of the Wal-Mart Stores division, said declining oil prices should affect the prices of store items, The Wall Street Journal reported. "We will aggressively look for opportunities" to share cost savings with customers, he said.

Some retailers are using food companies' earnings reports as leverage to reject price increases, industry analysts told the paper.

Kraft Foods Inc. and Kellogg Co. both reported higher-than-expected quarterly earnings last week, due in part to price increases, the report stated. Kraft's revenue rose 19 percent from the year-earlier period, while net income for the third quarter was $1.4 billion, and Kellogg's sales climbed 9.5 percent with a net income of $342 million.

While declining to comment on relations with retailers, Kraft Chief Executive Irene Rosenfeld told the Journal the company might have to slow price increases.

"As we look ahead, we're assuming our margin growth will come from volume growth and higher-margin products in the portfolio and not pricing," she said.

In addition, Kellogg Chief Executive David Mackay told the paper he has yet to see a dramatic shift in how retailers are negotiating pricing and promotions, but "certainly there's a heightened sensibility to the pressure that consumers are under. Naturally that's going to lead to very full discussions on all these topics."

He added the economic slowdown is leading the company to increase its focus on cost controls, according to the report.